Foreclosure Starts are down for both the month, and Year over Year. Expect some to claim how things are improving. However, as the article suggests, there are reasons for the drop.

The National Mortgage Settlement (Feb 2012) and the OCC Consent Decree (Apr 2011) have severely reduced foreclosures over the past 18 months. Those in the business began to see significant drops in May 2011, with the Consent Decree. With the Settlement, it was expected that further drops would occur.

The Settlement requires that when a homeowner misses a payment, the lender must contact the borrower, or attempt to contact the borrower, about foreclosure alternatives. Only after a period of time, usually 14 days to 1 month, can the loan be sent for foreclosure. (The 14 days to 1 month time frame varies due to different state statutes that might require longer periods of time.) If a borrower responds to the lender contact, all foreclosure processing stops until a modification review is done. This can take from a minimum of three months, to literally a year or more, dependent upon whether the borrower provides additional information quickly or appeals any mod denial. (I am looking at one that has been ongoing since Jun 2010 and still no decision.) Only when a final decision is reached, and no more appeals allowed, can a lender foreclosure. So, it is easy to see why foreclosure starts are down, and will continue to be so for about 3-6 months.

What is really important to note in the chart is the repeat starts. Repeat starts are generally about 15% to 20% of the total number. These are modifications that have failed. The borrowers will have another attempt to modify, so these will not go immediately to a true foreclosure. But, almost all will end up in foreclosure.

The National Mortgage Settlement and provisions it outlined for mortgage servicers may have accounted for a steep 21.9% drop in foreclosure starts in October, according to Lender Processing Services' Mortgage Monitor.

While it may be tempting to attribute the drop in starts to an improving housing market, LPS warns not to jump to conclusions about the decline in foreclosure starts.

The data firm attributes the steep drop to servicing changes outlined by the $25 billion mortgage-servicing settlement that took effect around the month of September. One of those changes was a requirement that servicers give borrowers a 14-day notice in writing before referring a loan to foreclosure. Those letters were first mailed in September and the steep drop in foreclosure starts came soon after, according to LPS.

With that in mind, LPS suggests the quick drop in foreclosure starts may be a temporary trend that is subject to change.

At the same time, prices are going up nationwide, with prices up 3.6% year-over-year in September and on track to gain 5% to 7% this year alone.

Still, the housing market is far from recovery, LPS points out. In fact, by the firm's own estimations, the market is now churning sales at half the pace established during the peak of the housing market.

There have been about 4.1 million sales over the past 12 months, compared to 8.2 million in the fall of 2005, LPS said. Furthermore, about a third of the sales in the past 12 months, approximately 1.3 million, were considered distressed. That is well above the 226,000 sales recorded in 2005. And prices, while improving, are still 23% below peak levels, according to LPS.

But LPS sees its latest mortgage monitor as somewhat of a mixed bag, with prepayment rates showing a possible rise in October originations and mortgage bond spreads performing better.

The percentage of delinquent mortgages in the U.S. hit 7.03% in October. The states with the highest percentage of non-current loans include Florida, Mississippi, New Jersey, Nevada and New York.

Those with the lowest percentage of non-current loans were Montana, Wyoming, South Dakota, Alaska and North Dakota.

Citi's Global Head of Credit Strategy, Matt King, has a knack for putting together useful illustrations.

Here, he examines one of the implications of one of the most powerful forces in all of economics: demographics.

King explained his charts to us like this:

It's what I like to call "the most depressing slide I've ever created." In almost every country you look at, the peak in real estate prices has coincided – give or take literally a couple of years – with the peak in the inverse dependency ratio (the proportion of population of working age relative to old and young).

In the past, we all levered up, bought a big house, enjoyed capital gains tax-free, lived in the thing, and then, when the kids grew up and left home, we sold it to someone in our children's generation. Unfortunately, that doesn't work so well when there start to be more pensioners than workers.

The slide:

If this chart is anywhere accurate, then it is simply more evidence of what is to come.

First-time homebuyers have played only a small part in the nation's housing recovery, with investors and cash buyers doing a lot of the buying in key real estate markets.

But Trulia's chief economist Jed Kolko is more positive about this age group. He sees them turning a corner on the jobs front, which is the first step towards growing homeownership numbers.

He notes the month of November brought forth more solid numbers on the jobs front, especially among the 25-to-34 year old age demographic. With this demographic generally in the prime age group for first-time home buying, Kolko is decidedly more optimistic about what this age group may do for the housing market in the coming years.

"The good news: among 25-34 year-olds, the prime age group for housing demand, 75.2% were employed in November, up from 75.1% in October and from 73.9% in November 2011," Kolko wrote.

The unemployment rate for this age group sat at 7.9% in November, which is high, but down from 9.2% a year earlier.

The student debt situation and employment numbers have weighed heavily on this group, keeping them from homeownership. But Kolko's assessment on Friday is more hopeful.

Will first-time homebuyers make a come back in the next few years? That's the looming question as we steer timidly into 2013.

My comments:

What type of jobs are they getting? How are they going to purchase a home when all their income will go to meeting living expenses and paying off student debt? Where is the Down Payment going to come from?

I was contacted last month by a law firm representing investors going after the lender. The law firm is preparing a lawsuit, but has problems in that they do not have enough information regarding the actual loans. They only have Trust information about loan performance and basic loan level information. They believe that at this stage, they need more than what they have, but until the lawsuit survives the "dismissal stage", they cannot get access to the loan files.

Most analytic companies can do some work from the available information, primarily reporting the basic numbers and percentages of the loans in default. But that is generally all that they can do at this stage.

I can go much further, with my loan default analysis, taking the available information and using a predictive model that shows why each loan defaulted among other issues. This would allow for discovery which would end up with the actual loan files being provided for analysis.

If the firm retains me, I can finally put everything I know together in one "package", and really become the "key" to these type suits going forward.

The California housing recovery boomed forward in November, with home prices reaching levels high enough to trigger questions about whether speculators are overdoing a spending spree.

The median price of all houses and condos sold in the Golden State was $291,000 last month, up 2.1% from October and 19.3% from $244,000 in November 2011, the DataQuick real-estate information firm said Thursday. The median is the point at which half the sales are for more and half for less.

The number of homes sold rose nearly 15%, to 37,481, according to the count by San Diego-based DataQuick. Sales of homes that had been foreclosed on made up 16.6% of the sales -- about half the percentage in November 2011 and the lowest level of foreclosure sales since October 2007.

Homes purchased for all cash remained at extremely high levels, mostly because of investors snapping up homes after the huge price declines of the housing bust. DataQuick analyst Andrew LePage said 32.5% of all November home sales in California were for cash, more than twice the long-term average.

The run-up in prices caught the attention of Dean Baker, co-director of the Center for Economic Policy and Research in Washington, who regarded the trend as “serious grounds for concern that these markets are being driven by speculation.”

Quiz: The year in business, 2012

“While some speculators buying up homes at a bottom can be positive, the sort of price rises that you are seeing there may be excessive,” Baker said in an email to The Times.

He noted that a big factor in the rising median price is increased sales of high-end homes, which skew the results to the upside. Indexes that track specific home resales, such as Case-Shiller, show far lower price appreciation.

Still, Baker said he thought the California market could experience “serious gyrations” because of the heavy purchases by investors hoping to sooner or later flip the homes at a profit.

“The speculators likely have pushed prices above where the market would put them in some markets,” he said.

Ed Leamer, director of the UCLA Anderson Forecast of the economy, had a more sanguine take on the trend than Baker.

“I am inclined to think that what he calls speculators know more about the market than he does,” Leamer said. “It’s a good thing for professionals to be putting a floor under home prices.”

LA Times: "The California housing recovery boomed forward in November, with home prices reaching levels high enough to trigger questions about whether speculators are overdoing a spending spree."

Good news, maybe... Deeper in the story: "a big factor in the rising median price is increased sales of high-end homes, which skew the results to the upside. Indexes that track specific home resales show far lower price appreciation."

- Where have we heard that. Median over a short duration tells you which homes are selling, not price appreciation. No comparison to the peak, only to the trough.

"Homes purchased for all cash remained at extremely high levels..."

- Does this mean interest rates are too high, lol? Buying houses, especially at the high end, is a way to keep cash idle and unproductive in hard assets. It is the opposite of building or expanding a business and hire workers. High end cash sales, by nature, are unsustainable - all speculators have finite purchasing power. And sold off other assets (forestalling capital gains?) to buy these.

“It’s a good thing for professionals to be putting a floor under home prices.”

- Yes, get the correction stopped before working people raising families can afford them.

What is a federal government agency chartered to help people get into home ownership doing helping people get out of their homes? And then bungling it!

They don't know how far they misunderestimated, by a factor of 10, next we will give them healthcare??---------------------Housing and Urban Development Secretary told the Senate that the Federal Housing Administration's once-modest reverse-mortgage program is the latest drain on taxpayers thanks to gross mismanagement.

FHA will lose $2.8 billion this fiscal year on reverse mortgages, and in the worst case $28.3 billion, with the losses stretching through 2019. The feds have no idea how big the pool of red ink might be.

At least FHA guarantees for home purchases foster Congress's professed goal of homeownership—though we've seen in the housing bust how that misallocates capital. But guarantees for reverse mortgages go to people who are already homeowners who want to cash out of a real-estate asset. That's fine if they want to do it at their own risk. FHA's guarantees are essentially a subsidy for older Americans to spend down their savings. FHA crowded out competitors and now accounts for 90% of outstanding reverse mortgages.

The Reverse Mortgage is a unique product, to say the least. Homeowners 65 or over are allowed to take equity out of the home monthly, based upon the equity in the home.

Generally, to get an RM, one had to have sufficient equity in the home. No more than a 65% Loan to Value was allowed, if I remember correctly. Payments were based upon the equity, and upon the homeowner living to age 95. It was thought that this would protect the lender in the event of default.

The "suspect" loans were the loans taken out from 2004 through 2007, while home values were still inflated. When values fell, the Loan to Values were now 100%, but the homeowner was still able to take the money monthly. So these homes continue to go even more and more Negative Equity, each and every month that the homeowner still lives.

FHA and other reverse lenders cannot determine losses because they have no idea how long the homeowners are going to live. Some who die "quickly", the losses will be small. Those who die slowly, the losses will be quite severe.

To give you an example of how bad it is, I know one person who took out an RM at the peak. His home was valued at $550k, and he was 75 at the time. The loan was based upon $357k, at 65% loan to value. His home is now worth about $170k, a drop of $380k.

If this guy lives to 95, the losses are going to be incredible on this loan.

PP, interesting. Like life insurance, it is a form of legalized gambling. Only the federal government could turn that into a big money loser.

"FHA and other reverse lenders cannot determine losses because they have no idea how long the homeowners are going to live. Some who die "quickly", the losses will be small. Those who die slowly, the losses will be quite severe."

I try to avoid products that give someone a motive to speed up my demise...

Existing home sales rose 5.9% in November to an annual rate of 5.04 million units, coming in higher than the consensus expected 4.90 million. Sales are up 14.5% versus a year ago.Sales in November were up in all major regions. The increase in sales was due to a faster sales pace for both single-family homes and condo/coops.The median price of an existing home rose to $180,600 in November (not seasonally adjusted), and is up 10.1% versus a year ago. Average prices are up 10.3% versus last year.

The months’ supply of existing homes (how long it would take to sell the entire inventory at the current sales rate) fell to 4.8 in November from 5.3 in October. The decline in the months’ supply was due to a faster selling pace and lower inventories for both single-family homes and condo/coops.

Implications: There should be no doubt the housing market is in recovery. Existing home sales rose 5.9% in November, reaching the highest sales pace since November 2009, which was artificially boosted by the $8,000 home credit. Taking that one month out, this is the highest rate of sales since July 2007. Sales are up 14.5% from a year ago. Meanwhile, the inventory of existing homes fell to 2.03 million in November from 2.11 million in October, the lowest level since December 2001. Inventories are down 22.5% from a year ago and the months’ supply of homes (how long it would take to sell the entire inventory at the current selling rate) fell to 4.8, the lowest level since October 2005. Just a year ago, the months’ supply was 7.1. In the year ahead, higher prices and sales volumes should lure more potential sellers into the market. The 10.1% gain in median prices versus a year ago can be attributed to a couple of factors. First, a lack of inventory while demand is picking up. Second, fewer distressed sales and more sales of larger homes. In general, it still remains tougher than normal to buy a home. Despite record low mortgage rates, home buyers face very tight credit conditions. Tight credit conditions would also explain why all-cash transactions accounted for 30 percent of purchases in November versus a traditional share of about 10 percent. Those with cash are able to take advantage of home prices that are extremely low relative to fundamentals (such as rents and replacement costs); for them, it’s a great time to buy. With credit conditions remaining tight, we don’t expect a huge increase in home sales anytime soon, but the housing market is definitely on the mend. In other housing news this morning, the FHFA index, which measures prices for homes financed by conforming loans, increased 0.5% in October and is up 5.6% from a year ago.

PP, Your chart from 1960 shows what I have been asking or saying of Wesbury. The tail end of that chart showing very slight improvements from the near zero point of the collapse is all we hear, statements like 'up from a year ago' or 'highest level in 3 years', without showing the historical context of how bad things still are. Readers here are getting a better picture of it.

With all the health and energy efficiency improvements available, wouldn't everyone want a new home today if economic conditions allowed it?

You are absolutely correct about people wanting a new home over re-sales. And this is especially true with any move up buyer. Why purchase a re-sale when you can get/order a new construction home with all the extras that you desire, and you get to landscape a yard as you desire. Additionally, you do not have the problems of repairs needed in re-sales.

The first time buyers of new construction will be the ones to really be concerned with. A first time buyer has no true knowledge of the costs of home ownership. As they buy new construction homes, after closing, they must put in back yards, furnish and model the rooms, generally buy additional appliances, and who knows what else. The result is that most of this is done by use of more credit. Quickly, the homeowner becomes over extended, and runs into financial stress. (For first time buyers, re-sales are much more favorable to maintaining a better financial situation, since the work has already been done previously.)

One thing we saw quite often, actually commonplace, were new construction homes being foreclosed upon without having the normal needed upgrades, especially yards, drapery, etc. The first time buyers could not afford the upgrades, and never did them, unless the home value went up and they refinanced, pulling cash out to pay off debt, and do the needed work. Of course, this only increased their debt load. (Hmmm, one more factor I need to include in my Default Risk Analysis.)

One final thing............it is VERY common to see after buying a home, for the new homeowner to go out and buy a new car. This is because they were advised to hold off purchasing a car until after the home closed, otherwise they would not qualify due to debt ratios. But the second the loan closed, they were out buying a car.

"it is VERY common to see after buying a home, for the new homeowner to go out and buy a new car. This is because they were advised to hold off purchasing a car until after the home closed, otherwise they would not qualify due to debt ratios. But the second the loan closed, they were out buying a car."

Not to mention everything that goes in a new house, furniture, drapes, major appliances...

New single-family home sales rose 4.4% in November, to a 377,000 annual rate, very close to the consensus expected pace of 380,000. Sales are up 15.3% from a year ago.Sales were up in the South and Northeast, but down in the West and Midwest.

The months’ supply of new homes (how long it would take to sell the homes in inventory) fell to 4.7. The decline was all due to a faster selling pace. Inventories of new homes rose 2,000 units.

The median price of new homes sold was $246,200 in November, up 14.9% from a year ago. The average price of new homes sold was $299,700, up 19.9% versus last year.Implications: New home sales, which typically are the last piece of the housing puzzle to recover, rose 4.4% in November and are up 15.3% from a year ago. Meanwhile, as the lower chart to the right shows, although overall inventories remain close to record lows, inventories have risen for three consecutive months as builders are getting more confident in the recovery. Despite the recent upturn in inventories, the faster pace of sales drove the months’ supply of new homes down to 4.7, tying the lowest level since 2005. This is well below the average of 5.7 over the past 20 years and not much above the 4.0 months that prevailed in 1998-2004, during the housing boom. The median price of a new home is up 14.9% from a year ago, consistent with the positive year over year increases we have been seeing from other home price indices. In other news this morning, new claims for unemployment insurance declined 12,000 last week to 350,000. However, due to the extra federal holiday on December 24, many states estimated claims, making this week’s data less reliable than usual. Continuing claims for regular state benefits declined 32,000 to 3.21 million. Claims data and other figures suggest payrolls will be up about 155,000 for December while the jobless rate stays at 7.7%. (These forecasts may change based on next week’s ADP, Intuit, and claims reports.) In other recent housing news, the Case-Shiller index, which measures prices in the 20 largest metro areas around the country, increased 0.7% in October (seasonally-adjusted) and is up 4.3% from a year ago. Since the bottom in January, prices are up at a 7.3% annual rate. Recent price gains have been led by Atlanta, Las Vegas, San Diego, and Phoenix. In the factory sector, the Richmond Fed index, which measures manufacturing sentiment in the mid-Atlantic, came in at +5 in December versus +9 in November.

Hey Wesbury! Why don't you admit that Sales are on an Annual Basis rate of $363k for the year. This would be an increase over last year of 18%......Wow!!!!!

The Fed started keeping stats on New Home Sales in 1963, when the population of the US was in the 160's million.

2012 will be the 3rd Worst Year since the stats began............only 2011 and 2010 were worse.

I don't think I want him for an advisor.

BTW, had a long talk this afternoon with a guy who has a company that does Portfolio Risk Analysis for the big banks. His partner used to be head of Risk Analysis in Bank of Canada, has done the same for the GSE's, and other US banks. His perspective is as mine.................everything sucks until we get Securitization of loans back on track, and lenders and investors know what they are buying.

Jan 21, the Consumer Finance Protection Bureau is coming out with the new Residential Lending Guidelines for GSE loans. The guidelines will set the "standard" for new lending with what the GSE's will buy. It will also detail future restrictions on lending and lenders financial "duties" to borrowers.

The CFPB has been considering a few major changes that have been hotly contested. They are

1. Debt Ratios of 31% for housing and 36% total for GSE loans2. Loan to Value of 80% or less3. No simultaneous 2nd mortgage piggy backs4. No FICO scores used. Only recent history to include no 60 day mortgage lates in the last two years.5. Loans not sold to the GSE's requiring the lender to keep a 5% minimum partial interest in the loan.6. A "Safe Harbor" provision whereby loans meeting the GSE requirements would not allow the borrower to have legal recourse against the GSE's except for TILA/RESPA violations.7. A method for reducing and then eliminating the GSE's.

The American Securitization Forum and other entities have been trying to work with the CFPB and other groups to develop the new guidelines. These different groups have felt that the CFPB has been acting in good faith developing the new guidelines. I have been trying to tell the ASF that they are being set up.

The new regulations will do the following.

1. It will reinforce the GSE's position by making them the lender of first resort. Lenders will go to them for the Safe Harbor provision. The GSE's will cream the best of the loans, those having little risk.

2. It will not restart securitization. Enough lenders will not exist with the ability to absorb the 5% interest retention. Mortgage bankers will cease to exist. Only banks will be able to lend for securitization, and they will be reluctant to accept the 5% risk retention.

3. Non GSE loans will not have the Safe Harbor provision. All such loans will have the lender having a Fiduciary Duty to the borrower for ability to repay the loan. (I have already developed the analysis to show that a borrower could or could not afford the loan. With this, I could either show the Duty has been met, or I could provide the homeowner with the ability to file a legitimate lawsuit against the lender for a Duty violation. I am just waiting for things to happen.)

This whole thing is simply another power grab by the GSE's to maintain their position in the marketplace without fear of risk. They get the best loans, and with a provision that they cannot be sued when things go bad.

When the new regs come out, I will be doing a complete analysis for a couple of websites. I will also post here.

The government and CFPB is seriously considering taking Privately Securitized Mortgages and allowing those over 125% LTV to refinance through HARP into the GSE's. For 5 years, the government would pay the difference between the new interest rate, currently about 3.25%, and what the previous rate was on each loan, usually above 6%. After 5 years, this guarantee ends and the investor gets the new rate.

There are some things about this article that are "puzzling".

1. If the GSE's are refinancing the loans, then why is the RMBS investors going to continue receiving both the new interest rate, and also the guarantee on the original rate? If it is a refinance, then the RMBS no longer have the loans on their books. The loans have been retired.

2. Why will the RMBS continue to receive the new interest rate after 5 years? Again, the loan was retired.

3. If the RMBS is keeping the new loan, why are the GSE's guaranteeing the loans? Why is the tax payer assuming all the risk on privately held mortgages?

It sounds like the government is almost turning the loans into modifications and not refinances, and guaranteeing the loans.

Again, I believe that Dodd Frank, the CFPB and the government is doing nothing more than trying to eliminate the Private Housing Market.

The Treasury Department is considering a plan to expand the government's refinancing program to help borrowers whose loans aren't backed by the government, but the idea is getting a chilly reception from a mortgage investor group.

The Making Homes Affordable Refinance Program, initiated in 2009, has helped more than a million borrowers stay in their homes by modifying their loans, but it only applies to borrowers who have government-backed loans through Fannie Mae and Freddie Mac. The Obama administration would like to expand the program by transferring loans controlled by private investors to those two government-sponsored mortgage firms..

Under the proposal eligible borrowers must be severely underwater, with a loan to value ratio of 125 percent or higher and must be current with their payment. These borrowers would be given current market interest rates, replacing the 6 percent rates they've been unable to refinance out of (because they don't have any equity in the home) and giving them a lower overall monthly payment. The Treasury Department, probably with leftover TARP funds, would pay investors the difference between the old interest rate and the new for five years.

But the American Securitization Forum, which represents investors in residential mortgage backed securities, is balking at the idea, arguing that while underwater borrowers are at greater risk for default it's not clear reducing their monthly payment will change that. It figures $120 billion worth of loan principal would qualify. Taxpayers would kick in $11.5 billion to make up for the reduced interest payments for the first five years and investors would subsequently lose $9.7 billion for the following years.

"The key question from the policy side for both investors and taxpayers is would providing this reduction in monthly interest payments provide any benefit either to the investors or to the public at large by reducing foreclosures? Our answer is we don't think it will appreciably reduce people walking away from their homes," said Tom Deutsch, executive director of ASF.

Investors have been unwilling to reduce interest amountswithout reducing the risk of default. "If they are getting a 6percent interest now, why would they want to turn that into a 3.5 percentif the borrower would still pay the 6%. It would seem wholly irrational toreduce their interest rate if it's not likely to prevent a walk-away borroweror a foreclosure," said Deutsch.

The latest proposal, first reported by the Wall StreetJournal, emerged as part of the "fiscal cliff" negotiations.

Home prices appear to be making a steady recovery, with the latest S&P Case Shiller report showing a 4.3% annual price increase in October on the 20-city composite. A survey of economists by Zillow expects home prices to keep moving up, with expectations for prices to rise 3.1 percent in 2013. But prices are still 30 percent off their June 2006 peak for the 20-city composite. And it's worse in areas hard-hit by the bust. While Phoenix has been a roll for the last year, with prices up 22 percent, prices are still 47 percent below the peak.

Even with higher prices nearly 11 million borrowers still owe more on their mortgage than their home is worth, according to real estate researcher CoreLogic. Many believe it's those homeowners and those with near-negative equity, borrowers who have some equity, but not enough to afford a move, that will keep the housing market from returning to something close to a normal market.

That is a part of the reasoning, but there is more to it than that. Imagine reducing people's house payment from 6% down to 3.25%. Imagine the increase in disposable income in a homeowner's pocket. That amounts to billions freed up.

Also, another reason exists. LTV's greater than 125% have a higher likelihood of default. So the new action would be expected to reduce defaults to some degree. But, this assumes that people are interested in keeping their homes when they are severely underwater, and that a payment reduction would make a big difference in default likelihood.

For large numbers of homeowners who are in such negative equity positions, this may not the case. Many are now recognizing that they will never be above water in their lifetimes. At that point, why not go into default, walk away, and then re-buy a better home in 3-4 years, at a much better price than what they were paying on the old home.

The people who are receiving the HARP offers, whether GSE or Private currently, are making their payments. Liquidity does not appear to be a problem for them. Why would the Feds offer them a break, except to either free up additional disposable income, or stop the potential strategic defaults?

Even more disconcerting for me is that the GSE's will guarantee these loans. It is further reason to believe that the GSE's are not going away. And when the new Underwriting Guidelines come out next month, it will be a clear indication of what we can really expect with the GSE's.

PP: "2012 will be the 3rd Worst Year since the stats began............only 2011 and 2010 were worse. "

The omission of this elephant in the room is what is wrong with nearly all current reporting on housing.

"expectations for prices to rise 3.1 percent in 2013""Sales were up in the South and Northeast""Sales are up 15.3% from a year ago""median price of new homes sold was $246,200 in November, up 14.9% from a year ago"

"Why is the tax payer assuming all the risk on privately held mortgages? It sounds like the government is almost turning the loans into modifications and not refinances, and guaranteeing the loans. Again, I believe that Dodd Frank, the CFPB and the government is doing nothing more than trying to eliminate the Private Housing Market."

Amidst the witty repartee, I'd like to underline the preceding. As our Vice President would say "This is a BFD."

"Why is the tax payer assuming all the risk on privately held mortgages? It sounds like the government is almost turning the loans into modifications and not refinances, and guaranteeing the loans. Again, I believe that Dodd Frank, the CFPB and the government is doing nothing more than trying to eliminate the Private Housing Market."

Amidst the witty repartee, I'd like to underline the preceding. As our Vice President would say "This is a BFD."

Like everything this administration does, it's only temporary until the crash.

"Why is the tax payer assuming all the risk on privately held mortgages?... doing nothing more than trying to eliminate the Private Housing Market."

Yes, a Big Deal. Wrong on constitutional powers and limits, and as GM says, leading to a crash bigger than we have see.

If the people only knew the government was plotting a complete takeover of housing and healthcare and energy and transportation and agriculture and education, the vote would be... roughly 51-48 in favor.

Where in the constitution did the federal government get the power to do this? The Commerce Clause?? A house moves across state lines because money does?

Instead of asking what are the limits of this federal power, the supporters of big government ask the question backwards: Since we have all this power, control over mortgages in this case, how can we grow it further and use it to 'benefit' more people?

There is no S (savings) in S&L anymore. The top savings account pays 1/10th of one percent interest. Try illustrating the magical power of compound interest to your kid using that multiplier. There aren't people out there with combined, insured savings of $100,000 backing up every loan of $100,000. There is nothing there. Money is just printed, in bizarre amounts - billions and trillions, no exaggeration. There are technocrats making social engineering decisions using an increasingly diluted currency backed only with fiction and faith in technocrats and their ability to extend the fiction for another day. There isn't a private market for mortgages and there isn't a market interest rate anymore. It is all subsidized and manipulated.

"It's only temporary until the crash." And when it all fails, we blame the "free" market and intervene all the more.

A chart from Scott Grannis' website yesterday tells the same story in context:

Your real estate investment, if you were able to hold it, had no appreciation over the last 13 years. Yet for every million you had invested at the start of the year 2000, you owe up to $162,000 (capital gains tax on inflationary gain) if you sell next year (New federal rate+state tax +surcharge) - on NO real gain or income! Worse than that by more than double if held by a taxable C-corp.

Yet I have gone blue in the face arguing with Scott. He believes that the housing market is recovering and no matter what I try to show otherwise, he does not accept it.

Of course, he does not believe that the Fed is creating money either, or is deliberately lowering interest rates. For him, it is all supply and demand. That is much to general of an argument for me. I want to know why there is no demand.

Yesterday, the Consumer Bank Finance Protection Bureau came out with its final rules on Ability to Pay.

The BFPB was set up to protect the Homeowner. Among its requirements would be the lender having a Fiduciary Duty to a borrower to determine the Ability to Repay a loan. For enforcement, the homeowner would have a Private Right of Action to sue the lender. Yesterday, we found out where that would go.

The new Debt Ratio Guidelines establishes a 43% maximum Debt Ratio for the Qualified Residential Mortgage. The income and other factors of the loan would have to be properly verified. If so, then by having a 43% or less Debt to Income, the lender has a Safe Harbor, whereby the homeowner has no Private Right of Action.

The 43% DTI is greater than what the GSE's and FHA are doing right now. The GSE's are at 36% and the FHA is at 41%. So in effect, the BFPB has given permission to the GSE's to increase their Debt Ratio allowances, to 43%. But it does not stop there.

The BFPB also stated that any loan, even above 43%, if bought by the GSE's would qualify for the Safe Harbor. So, the GSE's and FHA can go up to whatever Debt Ratio that they desire, and originating lenders would be protected from the Ability to Pay legal issues.

Note that at 41%, the FHA has a 16% delinquency rate at this time. Where is the sense of 43%?

Let's take a loan of $175k. Borrower is married with 2 kids in grade school. Here is reality

The US Census for 2010 found that for a family of 2.5 people, living expenses average $1905 per month. How will these people make it at 43%

Now, what are the implications for lending in the future?

1. The GSE's and FHA will buy all Qualified Loans since the lenders will have the Safe Harbor provision on Ability to Pay.2. Politicians will put pressure on the GSE's and FHA to up Debt Ratios because the housing market will not be growing enough.3. Loan not meeting GSE or Safe Harbor requirements, including Stated Income, Interest Only, higher Debt Ratios, will only have either Private Securitization or Hard Money lenders for financing.4. Private Securitization will only accept a few loans, the best, since there is no Safe Harbor.5. Hard Money will only take loans with 65% or less Loan to Value.

The bottom line is that contrary to what is being said regarding the end of the GSE's in another 7 years, it will not happen. The GSE's will only cement their control of the Mortgage Market, maintaining their control of market share. Politicians will respond to the problem by allowing the GSE's to remain in business.

FHA will continue to grow, especially since they will continue to offer 3.5% equity loans. Never mind that these loans will fail in increasing numbers.